In an effort to simplify programmatic advertising Google has announced that it will transition their publisher inventory to a ‘first price auction’ for Google Ad Manager.
The full roll-out will take place over the upcoming months and is expected to be complete by the end of the year, with 100% of auctions using first price auctions for display and video inventory sold via Ad Manager.
What is the difference between first price and second price auctions?
In the current system, if an advertisers bid is the highest, they win the placement and pay $0.01 more than the second highest bid. With first price auctions, the winning bidder pays the full price that they bid.
Many publishers will already be working with SSPs that use first price auctions. However, the scale of Google’s enterprise means that a structural change, such as this, will have major impacts on the industry.
Here’s everything that’s changed and how digital publishers need to react.
The end of multi-stage auctions
Moving to a unified first price system also removes multi-stage auctions in which ads could pass through a mix of as many as 10 different auctions before a winning bid is selected. Using multi-stage, higher bidders can suffer because they bid in the first auction instead of the final one.
In the first auction, a winning bid of say $5, competing against a $3 bid will clear at $3.01. This bid then gets transferred to Google’s exchange bidding auction where it could lose to a bid of $3.02. Now all three bids will compete at the same time, allowing the highest bid to win.
The need for bid shading will rise
Bid shading is a trade-off between SSPs and DSPs in case the winning bid is too high. Before the gap between the winning and second bid really didn’t matter as the winner would only pay $0.01 more than the second highest bid. First price auctions mean that winning bids could way over the odds.
Using bid shading, if the winning bid is greatly overvalued, the buyer will pay something in between what the second-price and the first-price value would have been, based on a calculation made by the ad tech partner.
It uses analysis of bid history information, what prices bids are won and lost at, and other variables such as ad position or the type of website the auction is taking place on.
The ‘Last Look’ advantage will be gone for good
Using second price auctions, Google was able to give itself a contentious advantage in the industry. It reserved the right to have the ‘last look’ at the price and then purchase undervalued inventory for $0.01 higher, effectively arbitraging between its advertisers and itself.
Google announced that this advantage was removed in 2017, but the move to first price is seen as a more definitive example of a transparent and level playing field. Although, Google still retains the right to ignore the pricing floor for Adsense backfill.
Ad Exchange traffic will be subject to both the unified pricing floor and the Ad Exchange pricing floor. The floor price won’t be applied to AdSense backfill.
This could leave Google with a back-door to arbitrage undervalued inventory through Adsense.
Why is Google making the change?
The official line from Google is that this change is being implemented in order to ‘help simplify programmatic for our partners’. First price auctions will also help to clarify the supply chain between publishers, buyers, and Google. They also join other major exchanges, such as Index Exchange, OpenX, and Rubicon Project in first price bidding.
The change, of course, is also expected to improve Google’s already dominant position. By reducing the unique value of header bidding wrappers, Google will want to increase the market share of its own solution, exchange bidding.
By reducing its fee, cutting down the complexity, and with some help from the power of the Google brand, exchange bidding will aim to slow the domination of other header bidding solutions. Unified auctions using first price will help Google to attract the majority of supply by offering publishers a simpler, more transparent solution.
What will be the short-term effects?
In the short term, it’s likely that buyers are going to be the ones caught unawares. If buyers are entering into first price auctions using a second price strategy they will overpay for the inventory.
Not all advertisers will implement techniques such as bid shading in time for this change and are likely to push up ad prices for long-tail inventory.
However, for the bigger advertisers, operationally, little will change. Major DSPs have already built bid shading algorithms, which they will apply to Google’s auction, mitigating the effects this revenue burst.
Will this change disrupt header bidding as we know it?
It’s true that first price could reduce the negative impact of header bidding on Google’s market share. By unifying all auctions and reducing costs, Google has the opportunity to route all inventory through a single source.
By making the process more transparent and unifying auctions, Google seems to be hoping that publishers will default to using their solution as a simple, profitable platform that reduces the management workload of multiple platforms.
But, header bidding wrappers such as Prebid have other value, as well as having the first-mover advantage for first price auctions. It is open source, timeouts are configurable, deals can be set at any priority you see fit, multiformat banners are accepted (display, native & outstream) and allowing them to diversify.
Amazon and Facebook are also unlikely to shift their inventory through Google. This means publishers are likely to have to continue using a hybrid model of both systems.
So, what do publishers need to do?
The primary concern for publishers will be their price floors. Buyers can no longer set their ‘maximum possible’ price. They are forced to research and estimate what the second highest bid will be and pitch a viable price that will beat it.
This, and bid shading will likely see publishers trying to find the lowest possible price to pay per eCPM. Publishers should adapt their price floors against an expected aggressive bidding strategy from buyers.
Despite this, the transition period is likely to generate an uptick in revenue from Google before all advertisers adapt and technology manages to distill the margin between the first and second bids to a consistent minimum.
In the official announcement, Group Product Manager for Google, Sam Cos says, ‘’During this time, publishers and app developers will need to rethink how they use price floors and technology partners will need to adjust how they bid for Google Ad Manager Inventory.’’